commissioner of internal revenue vs. seagate technology (philippines)

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132 SUPREME COURT REPORTS ANNOTATED

Commissioner of Internal Revenue vs. Seagate Technology

(Philippines)

G.R. No. 153866. February 11, 2005.*

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs. SEAGATE TECHNOLOGY (PHILIPPINES),

respondent.

Taxation; Tax Exemption; Value Added Tax (VAT); Petitioner

is not subject to internal revenue laws and regulations and is even

entitled to tax credits. —From the above-cited laws, it is

immediately clear that petitioner enjoys preferential tax

treatment. It is not subject to internal revenue laws and

regulations and is even entitled to tax credits. The VAT on capital

goods is an internal revenue tax from which petitioner as an

entity is exempt. Although the transactions involving such tax are

not exempt, petitioner as a VAT-registered person, however, is

entitled to their credits.

Same; Same; Same; The VAT is an indirect tax that may be

shifted or passed on to the buyer, transferee or lessee of the goods,

properties or services. —Viewed broadly, the VAT is a uniform tax

ranging, at present, from 0 percent to 10 percent levied on every

importation of goods, whether or not in the course of trade or

business, or imposed on each sale, barter, exchange or lease of

goods or properties or on each rendition of services in the course

of trade or business as they pass along the production and

distribution chain, the tax being limited only to the value added tosuch goods, properties or services by the seller, transferor or

lessor. It is an indirect tax that may be shifted or passed on to the

buyer, transferee or lessee of the goods, properties or services. As

such, it should be understood not in the context of the person or

entity that is primarily, directly and legally liable for its payment,

but in terms of its nature as a tax on consumption. In either case,

though, the same conclusion is arrived at.

Same; Same; Same; Zero-rated transactions generally refer to



the export sale of goods and supply of services. —Zero-rated

transactions generally refer to the export sale of goods and supply

of services. The tax rate is set at zero. When applied to the tax

base, such rate obviously results in no tax chargeable against the

purchaser. The seller of such transactions charges no output tax,

but can claim

_______________

* THIRD DIVISION.

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a refund of or a tax credit certificate for the VAT previously

charged by suppliers.

Same; Same; Same; Respondent as an exempt entity, can

neither be directly charged for the VAT on its sales nor indirectly

made to bear as added cost to such sales, the equivalent VAT on its

purchases. —Applying the special laws we have earlier discussed,respondent as an entity is exempt from internal revenue laws and

regulations. This exemption covers both direct and indirect taxes,

stemming from the very nature of the VAT as a tax on

consumption, for which the direct liability is imposed on one

person but the indirect burden is passed on to another.

Respondent, as an exempt entity, can neither be directly charged

for the VAT on its sales nor indirectly made to bear, as added cost

to such sales, the equivalent VAT on its purchases. Ubi lex non

distinguit, nec nos distinguere debemus. Where the law does not

distinguish, we ought not to distinguish.

Same; Same; Same; Tax Refunds; Claimants of tax refunds

bear the burden of proving the factual basis of their claims; and of

showing, by words too plain to be mistaken, that the legislature

intended to exempt them. —Tax refunds are in the nature of such

exemptions. Accordingly, the claimants of those refunds bear the

burden of proving the factual basis of their claims; and of

showing, by words too plain to be mistaken, that the legislature

intended to exempt them. In the present case, all the cited legal



provisions are teeming with life with respect to the grant of tax

exemptions too vivid to pass unnoticed. In addition, respondent

easily meets the challenge.

PETITION for review on certiorari of a decision of the

Court of Appeals.

The facts are stated in the opinion of the Court.

Quisumbing and Torres for respondent.

PANGANIBAN, J.:

Business companies registered in and operating from the

Special Economic Zone in Naga, Cebu—like herein

respondent—are entities exempt from all internal revenue

taxes and

134



(Philippines)

the implementing rules relevant thereto, including the

value-added taxes or VAT. Although export sales are not

deemed exempt transactions, they are nonetheless zero-

rated. Hence, in the present case, the distinction between

exempt entities and exempt transactions has little

significance, because the net result is that the taxpayer is

not liable for the VAT. Respondent, a VAT-registered

enterprise, has complied with all requisites for claiming a

tax refund of or credit for the input VAT it paid on capital

goods it purchased. Thus, the Court of Tax Appeals and the

Court of Appeals did not err in ruling that it is entitled to

such refund or credit.

The Case

Before us is a Petition for Review1

under Rule 45 of the

Rules of Court, seeking to set aside the May 27, 2002

Decision2

of the Court of Appeals (CA) in CA-G.R. SP No.

66093. The decretal portion of the Decision reads as

follows:

“WHEREFORE, foregoing premises considered, the petition for

review is DENIED for lack of merit.”3



1.

2.

3.

4.

5.

The Facts

The CA quoted the facts narrated by the Court of Tax

Appeals (CTA), as follows:

“As jointly stipulated by the parties, the pertinent facts x x x

involved in this case are as follows:

[Respondent] is a resident foreign corporation duly

registered with the Securities and Exchange Commission

to do business in the Philippines, with principal office

address at the

_______________

1 Rollo, pp. 8-20.

2 Id., pp. 21-30. Thirteenth Division. Penned by Justice Mercedes Gozo-Dadole,with the concurrence of Justices Salvador J. Valdez, Jr. (chair) and Amelita G.

Tolentino (member).

3 CA Decision, p. 10; Rollo, p. 30. Bold types and caps in the original.

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new Cebu Township One, Special Economic Zone, Barangay

Cantao-an, Naga, Cebu;

[Petitioner] is sued in his official capacity, having been

duly appointed and empowered to perform the duties of

his office, including, among others, the duty to act and

approve claims for refund or tax credit;

[Respondent] is registered with the Philippine Export

Zone Authority (PEZA) and has been issued PEZA Certificate No. 97-044 pursuant to Presidential Decree No.

66, as amended, to engage in the manufacture of recording

components primarily used in computers for export. Such

registration was made on 6 June 1997;

[Respondent] is VAT [(Value Added Tax)]-registered entity

as evidenced by VAT Registration Certification No. 97-

083-000600-V issued on 2 April 1997;

VAT returns for the period 1 April 1998 to 30 June 1999



6.

7.

1.

2.

3.

4.

have been filed by [respondent];

An administrative claim for refund of VAT input taxes in

the amount of P28,369,226.38 with supporting documents

(inclusive of the P12,267,981.04 VAT input taxes subject

of this Petition for Review), was filed on 4 October 1999

with Revenue District Office No. 83, Talisay Cebu;

No final action has been received by [respondent] from

[petitioner] on [respondent’s] claim for VAT refund.

“The administrative claim for refund by the [respondent] on

October 4, 1999 was not acted upon by the [petitioner] prompting

the [respondent] to elevate the case to [the CTA] on July 21, 2000

by way of Petition for Review in order to toll the running of the

two-year prescriptive period.

“For his part, [petitioner] x x x raised the following Special and

Affirmative Defenses, to wit:

[Respondent’s] alleged claim for tax refund/credit is

subject to administrative routinary

investigation/examination by [petitioner’s] Bureau;

Since ‘taxes are presumed to have been collected in

accordance with laws and regulations,’ the [respondent]

has the burden of proof that the taxes sought to be

refunded were erroneously or illegally collected x x x;

136



(Philippines)

In Citibank, N.A. vs. Court of Appeals, 280 SCRA 459

(1997), the Supreme Court ruled that:“A claimant has the

burden of proof to establish the factual basis of his or her

claim for tax credit/refund.”

Claims for tax refund/tax credit are construed in

‘strictissimi juris’ against the taxpayer. This is due to the

fact that claims for refund/credit [partake of] the nature of

an exemption from tax. Thus, it is incumbent upon the

[respondent] to prove that it is indeed entitled to the

refund/credit sought. Failure on the part of the

[respondent] to prove the same is fatal to its claim for tax

credit. He who claims exemption must be able to justify

his claim by the clearest grant of organic or statutory law.



5.

6.

An exemption from the common burden cannot be

permitted to exist upon vague implications;

Granting, without admitting, that [respondent] is a

Philippine Economic Zone Authority (PEZA) registered

Ecozone Enterprise, then its business is not subject to

VAT pursuant to Section 24 of Republic Act No. ([RA])

7916 in relation to Section 103 of the Tax Code, as

amended. As [respondent’s] business is not subject to VAT,the capital goods and services it alleged to have purchased

are considered not used in VAT taxable business. As such,

[respondent] is not entitled to refund of input taxes on

such capital goods pursuant to Section 4.106.1 of Revenue

Regulations No. ([RR])7-95, and of input taxes on services

pursuant to Section 4.103 of said regulations.

[Respondent] must show compliance with the provisions of

Section 204 (C) and 229 of the 1997 Tax Code on filing of a

written claim for refund within two (2) years from the date

of payment of tax.’

“On July 19, 2001, the Tax Court rendered a decision granting the

claim for refund.”4

Ruling of the Court of Appeals

The CA affirmed the Decision of the CTA granting the

claim for refund or issuance of a tax credit certificate (TCC)in favor of respondent in the reduced amount of

P12,122,922.66.

_______________

4 CA Decision, pp. 2-4; Rollo, pp. 22-24. Citations omitted.

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This sum represented the unutilized but substantiated

input VAT paid on capital goods purchased for the period

covering April 1, 1998 to June 30, 1999.

The appellate court reasoned that respondent had

availed itself only of the fiscal incentives under Executive



Order No. (EO) 226 (otherwise known as the Omnibus

Investment Code of 1987), not of those under both

Presidential Decree No. (PD) 66, as amended, and Section

24 of RA 7916. Respondent was, therefore, considered

exempt only from the payment of income tax when it opted

for the income tax holiday in lieu of the 5 percent

preferential tax on gross income earned. As a VAT-

registered entity, though, it was still subject to thepayment of other national internal revenue taxes, like the

VAT.

Moreover, the CA held that neither Section 109 of the

Tax Code nor Sections 4.106-1 and 4.103-1 of RR 7-95 were

applicable. Having paid the input VAT on the capital goods

it purchased, respondent correctly filed the administrative

and judicial claims for its refund within the two-year

prescriptive period. Such payments were—to the extent of

the refundable value—duly supported by VAT invoices or

official receipts, and were not yet offset against any output VAT liability.

Hence this Petition.5

Sole Issue

Petitioner submits this sole issue for our consideration:

“Whether or not respondent is entitled to the refund or issuance of

Tax Credit Certificate in the amount of P12,122,922.66 rep-

_______________

5 The Petition was deemed submitted for decision on April 3, 2003, upon receipt

by the Court of petitioner’s Memorandum, signed by Assistant Solicitors General

Cecilio O. Estoesta and Fernanda Lampas Peralta and Associate Solicitor Romeo

D. Galzote. Respondent’s Memorandum, signed by Attys. Dennis G. Dimagiba and

Franklin A. Prestousa, was filed on March 7, 2003.

138



(Philippines)

resenting alleged unutilized input VAT paid on capital goods

purchased for the period April 1, 1998 to June 30, 1999.”6



The Court’s Ruling

The Petition is unmeritorious.

Sole Issue:

Entitlement of a VAT-Registered PEZA Enterprise to

a Refund of or Credit for Input VAT

No doubt, as a PEZA-registered enterprise within a specialeconomic zone,

7

respondent is entitled to the fiscal

incentives and benefits8

provided for in either PD 669

or EO

226.10

It shall, moreover, enjoy all privileges, benefits,

advantages or exemptions under both Republic Act Nos.

(RA) 722711

and 7844.12

_______________

6 Petitioner’s Memorandum, p. 5; Rollo, p. 99. Original in upper case.

7 Referred to as ecozone, it is a selected area with highly developed, or

which has the potential to be developed into, agroindustrial, industrial,

tourist/recreational, commercial, banking, investment and financial

centers. §4(a), Chapter I of RA 7916, otherwise known as “The Special

Economic Zone Act of 1995.”

8 §35, Chapter III of RA 7916.

9 PD 66 is the law creating the Export Processing Zone Authority or

EPZA. See 1st paragraph of §23, Chapter III of RA 7916.

10 EO 226, in Article 1 thereof, is also known as the “Omnibus

Investments Code” of 1987.See

1st paragraph of §23, Chapter III of RA 7916.

11 RA 7227, in §1 thereof, is also known as the “Bases Conversion and

Development Act of 1992.” See §51, Chapter VI of RA 7916.

12 RA 7844, in §1 thereof, is also known as the “Export Development

Act of 1994.” See 2nd paragraph of §23, Chapter III of RA 7916.

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(Philippines)

Preferential Tax Treatment

Under Special Laws

If it avails itself of PD 66, notwithstanding the provisions

of other laws to the contrary, respondent shall not be

subject to internal revenue laws and regulations for raw



materials, supplies, articles, equipment, machineries, spare

parts and wares, except those prohibited by law, brought

into the zone to be stored, broken up, repacked, assembled,

installed, sorted, cleaned, graded or otherwise processed,

manipulated, manufactured, mixed or used directly or

indirectly in such activities.13

Even so, respondent would

enjoy a net-operating loss carry over; accelerated

depreciation; foreign exchange and financial assistance;and exemption from export taxes, local taxes and licenses.

14

Comparatively, the same exemption from internal

revenue laws and regulations applies if EO 22615

is chosen.

Under this law, respondent shall further be entitled to an

income tax holiday; additional deduction for labor expense;

simplification of customs procedure; unrestricted use of

consigned equipment; access to a bonded manufacturing

warehouse system; privileges for foreign nationals

employed; tax credits on domestic capital equipment, as

well as for taxes and duties on raw materials; andexemption from contractors’ taxes, wharfage dues, taxes

and duties on imported capital equipment and spare parts,

export taxes, duties, imposts and fees,16

local taxes and

licenses, and real property taxes.17

_______________

13 §17(1) of PD 66.

14 §18 of PD 66.

15 Article 77(1), Book VI of EO 226.

16 Article 39 of EO 226, certain paragraphs of which are expressly

repealed by the 2nd paragraph of §20 of RA 7716, otherwise known as the

“Expanded Value Added Tax Law,” deemed effective May 27, 1994. See

Commissioner of Internal Revenue v. Michel J. Lhuillier Pawnshop, Inc. ,

406 SCRA 178, 187, July 15, 2003.

17 Article 78 of EO 226.

140



(Philippines)

A privilege available to respondent under the provision in

RA 7227 on tax and duty-free importation of raw materials,

capital and equipment18

—is, ipso facto, also accorded to the

zone19

under RA 7916. Furthermore, the latter law—



notwithstanding other existing laws, rules and regulations

to the contrary—extends20

to that zone the provision

stating that no local or national taxes shall be imposed

therein.21

No exchange control policy shall be applied; and

free markets for foreign exchange, gold, securities and

future shall be allowed and maintained.22

Banking and

finance shall also be liberalized under minimum Bangko

Sentral regulation with the establishment of foreigncurrency depository units of local commercial banks and

offshore banking units of foreign banks.23

In the same vein, respondent benefits under RA 7844

from negotiable tax credits24

for locally-produced materials

used as inputs. Aside from the other incentives possibly

already granted to it by the Board of Investments, it also

enjoys preferential credit facilities25

and exemption from

PD 1853.26

From the above-cited laws, it is immediately clear that

petitioner enjoys preferential tax treatment.27

It is notsubject to internal revenue laws and regulations and is

even entitled to tax credits. The VAT on capital goods is an

internal revenue tax from which petitioner as an entity is

exempt. Although

_______________

18 (b) of the 2nd paragraph of §12 of RA 7227.

19 §51, Chapter VI of RA 7916.


21 (c) of the 2nd paragraph of §12 of RA 7227.

22 (d) of the 2nd paragraph of §12 of RA 7227.

23 Referred to as the Central Bank under (e) of the 2nd paragraph of

§12 of RA 7227.

24 §17 of RA 7844.

25 §16 of RA 7844. See 2nd paragraph of §23, Chapter III of RA 7916.

26 PD 1853 was the law that took effect in 1983, requiring deposits of

duties upon the opening of letters of credit to cover imports.

27 2nd paragraph of §4, Chapter I of RA 7916.

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(Philippines)

the transactions involving such tax are not exempt,



petitioner as a VAT-registered person, however, is

entitled to their credits.

Nature of the VAT and

the Tax Credit Method

Viewed broadly, the VAT is a uniform tax ranging, at

present, from 0 percent to 10 percent levied on every

importation of goods, whether or not in the course of trade

or business, or imposed on each sale, barter, exchange or

lease of goods or properties or on each rendition of services

in the course of trade or business29

as they pass along the

production and distribution chain, the tax being limited

only to the value added30

to such goods, properties or

services by the seller, transferor or lessor.31

It is an indirect

tax that may be shifted or passed on to the buyer,

transferee or lessee of the goods, properties or services.32

As

such, it should be understood not in the context of theperson or entity that is primarily, directly and legally liable

for its payment, but in terms of its nature as a tax on

consumption.33

In either case, though, the same conclusion

is arrived at.

_______________

28 A “VAT-registered person” is a taxable person who has registered for

VAT purposes under §236 of the Tax Code. Deoferio and Mamalateo, The

Value Added Tax in the Philippines (1st ed., 2000), p. 265. See 9th

paragraph of §4.107-1(a) of Revenue Regulations No. (RR) 7-95,

implemented beginning January 1, 1996, as amended by §6 of RR 6-97,

effective January 1, 1997.

29 §§105 to 109 of RA 8424, as amended, otherwise known as the Tax

Code.

30 Kapatiran ng mga Naglilingkod sa Pamahalaan ng Pilipinas, Inc. vs.

Tan, 163 SCRA 371, 378-379, June 30, 1988.

31 De Leon, The Fundamentals of Taxation (12th ed., 1998), p. 131.

32 2nd paragraph of §105 of the Tax Code.

33 Deoferio, Jr. and Mamalateo, The Value Added Tax in the

Philippines (1st ed., 2000), pp. 33 & 36.

142



(Philippines)



The law that originally imposed the VAT in the country,

as well as the subsequent amendments of that law, has

been drawn from the tax credit method.35

Such method

adopted the mechanics and self-enforcement features of the

VAT as first implemented and practiced in Europe and

subsequently adopted in New Zealand and Canada.36

Under the present method that relies on invoices, an entity

can credit against or subtract from the VAT charged on itssales or outputs the VAT paid on its purchases, inputs and

imports.37

If at the end of a taxable quarter the output taxes38

charged by a seller39

are equal to the input taxes40

passed

on by the suppliers, no payment is required. It is when the

output taxes exceed the input taxes that the excess has to

be paid.41

If, however, the input taxes exceed the output

taxes, the excess

_______________

34 EO 273.

35 Vitug, J. and Acosta, Tax Law and Jurisprudence (2nd ed., 2000), p.

227.

See §193(d) of the National Internal Revenue Code of 1977 as further amended by

§1 of Pres. Decree No. 1358 dated April 21, 1978, wherein the tax credit method,

instead of the cost deduction method, was mandated to be applied in computing

the VAT due.

36 Deoferio, Jr. and Mamalateo, supra, p. 34.

37 Id., pp. 34-35.

38 “Output taxes” refer to the VAT due on the sale or lease of taxable

goods, properties or services by a VAT-registered or VAT-registrable

person. See last paragraph of §110(A)(3) and §236 of the Tax Code.

39 Presumed to be VAT-registered.

40 By “input taxes” is meant the VAT due from or paid by a VAT-

registered person in the course of trade or business on the importation of

goods or local purchases of goods or services, including the lease or use of

property from a VAT-registered person. See penultimate paragraph of

§110(A)(3) of the Tax Code.

41 §110(B) of the Tax Code.

VAT-registered persons shall pay the VAT on a monthly basis. §114(A) of the Tax

Code.

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shall be carried over to the succeeding quarter or

quarters.42

Should the input taxes result from zero-rated or

effectively zero-rated transactions or from the acquisition

of capital goods,43

any excess over the output taxes shall

instead be refunded44

to the taxpayer or credited45

againstother internal revenue taxes.

46

Zero-Rated and Effectively

Zero-Rated Transactions

Although both are taxable and similar in effect, zero-rated

transactions differ from effectively zero-rated transactions

as to their source.

Zero-rated transactions generally refer to the export sale

of goods and supply of services.47

The tax rate is set atzero.

48

When applied to the tax base, such rate obviously

results in no tax chargeable against the purchaser. The

seller of such transactions charges no output tax,49

but can

claim a refund of or a tax credit certificate for the VAT

previously charged by suppliers.

_______________

42 §110(B) of the Tax Code.

43 These are goods or properties with estimated useful lives greater

than one year and which are treated as depreciable assets under §34(F)

[formerly §29(f)] of the Tax Code, used directly or indirectly in the

production or sale of taxable goods or services. 3rd paragraph of §4.106-

1(b) of RR 7-95.

These goods also refer to “capital assets” as this term is defined in

§39(A)(1) of the Tax Code.

44 De Leon, p. 135.


46 Subject to the provisions of §§106, 108 and 112 of the Tax Code.47 De Leon, p. 133.


49 De Leon, p. 133.

144





(Philippines)

Effectively zero-rated transactions, however, refer to the

sale of goods50

or supply of services51

to persons or entities

whose exemption under special laws or international

agreements to which the Philippines is a signatory

effectively subjects such transactions to a zero rate.52

Again, as applied to the tax base, such rate does not yieldany tax chargeable against the purchaser. The seller who

charges zero output tax on such transactions can also claim

a refund of or a tax credit certificate for the VAT previously

charged by suppliers.

Zero Rating and

Exemption

In terms of the VAT computation, zero rating and

exemption are the same, but the extent of relief that resultsfrom either one of them is not.

Applying the destination principle53

to the exportation of

goods, automatic zero rating54

is primarily intended to be

enjoyed by the seller who is directly and legally liable for

the VAT, making such seller internationally competitive by

allowing the refund or credit of input taxes that are

attributable to export sales.55

Effective zero rating, on the

contrary, is intended to benefit the purchaser who, not

being directly and legally liable for the payment of the

VAT, will ultimately bear the burden of the tax shifted by

the suppliers.

In both instances of zero rating, there is total relief for

the purchaser from the burden of the tax.56

But in an

exemption

_______________

50 §106(A)(2)(c) of the Tax Code.

51

§108(B)(3) of the Tax Code.52 Deoferio, Jr. and Mamalateo, supra, p. 215.

53 Under this principle, goods and services are taxed only in the country

where these are consumed. Thus, exports are zero-rated, but imports are

taxed. Id., p. 43.

54 In business parlance, “automatic zero rating” refers to the standard

zero rating as provided for in the Tax Code.


56 Id., p. 43.



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there is only partial relief ,

57

because the purchaser is notallowed any tax refund of or credit for input taxes paid.

58

Exempt Transaction

and Exempt Party

The object of exemption from the VAT may either be the

transaction itself or any of the parties to the transaction.59

An exempt transaction, on the one hand, involves goods

or services which, by their nature, are specifically listed in

and expressly exempted from the VAT under the Tax Code,without regard to the tax status—VAT-exempt or not—of

the party to the transaction.60

Indeed, such transaction is

not subject to the VAT, but the seller is not allowed any tax

refund of or credit for any input taxes paid.

An exempt party, on the other hand, is a person or entity

granted VAT exemption under the Tax Code, a special law

or an international agreement to which the Philippines is a

signatory, and by virtue of which its taxable transactions

become exempt from the VAT.61

Such party is also not

subject to the VAT, but may be allowed a tax refund of or

credit for input taxes paid, depending on its registration as

a VAT or non-VAT taxpayer.

As mentioned earlier, the VAT is a tax on consumption,

the amount of which may be shifted or passed on by the

seller to the purchaser of the goods, properties or services.62

While the liability is imposed on one person, the burden

may be passed on to another. Therefore, if a special law

merely exempts a party as a seller from its direct liability

for payment of the VAT, but does not relieve the sameparty as a purchaser from

_______________

57 Id., p. 121.

58 De Leon, pp. 133 & 135.


60 Id., p. 132.

61 Id., pp. 132-133.



62 De Leon, p. 132.

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(Philippines)

its indirect burden of the VAT shifted to it by its VAT-

registered suppliers, the purchase transaction is not

exempt. Applying this principle to the case at bar, the

purchase transactions entered into by respondent are not

VAT-exempt.

Special laws may certainly exempt transactions from the

VAT.63

However, the Tax Code provides that those falling

under PD 66 are not. PD 66 is the precursor of RA 7916—

the special law under which respondent was registered.The purchase transactions it entered into are, therefore,

not VAT-exempt. These are subject to the VAT; respondent

is required to register.

Its sales transactions, however, will either be zero-rated

or taxed at the standard rate of 10 percent,64

depending

again on the application of the destination principle.65

If respondent enters into such sales transactions with a

purchaser—usually in a foreign country—for use or

consumption outside the Philippines, these shall be subject

to 0 percent.66

If entered into with a purchaser for use or

consumption in the Philippines, then these shall be subject

to 10 percent,67

unless the purchaser is exempt from the

indirect burden of the VAT, in which case it shall also be

zero-rated.

Since the purchases of respondent are not exempt from

the VAT, the rate to be applied is zero. Its exemption under

both PD 66 and RA 7916 effectively subjects such

transactions to a zero rate,68

because the ecozone within

which it is registered is managed and operated by thePEZA as a separate customs territory.

69

This means that in

such zone is created the legal

_______________

63 §109(q) of the Tax Code.


65 Id., p. 69.

66 §106(A)(2) of the Tax Code.



67 §106(A)(1) of the Tax Code.

68 §106(A)(2)(c) of the Tax Code.

69 1st paragraph of §8, Chapter I of RA 7916.

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Commissioner of Internal Revenue vs. Seagate Technology(Philippines)

fiction of foreign territory.70

Under the cross-border

principle71

of the VAT system being enforced by the Bureau

of Internal Revenue (BIR),72

no VAT shall be imposed to

form part of the cost of goods destined for consumption

outside of the territorial border of the taxing authority. If

exports of goods and services from the Philippines to a

foreign country are free of the VAT,

73

then the same ruleholds for such exports from the national territory—except

specifically declared areas—to an ecozone.

Sales made by a VAT-registered person in the customs

territory to a PEZA-registered entity are considered

exports to a foreign country; conversely, sales by a PEZA-

registered entity to a VAT-registered person in the customs

territory are deemed imports from a foreign country.74

An

ecozone—indubitably a geographical territory of the

Philippines—is,

_______________

A “customs territory” means the national territory of the Philippines outside of the

proclaimed boundaries of the ecozones, except those areas specifically declared by

other laws and/or presidential proclamations to have the status of special economic

zones and/or free ports. §2.g, Rule 1, Part I of the “Rules and Regulations to

Implement Republic Act No. 7916, otherwise known as ‘The Special Economic

Zone Act of 1995.’ ”


71 This principle is not clearly defined by any law or administrative

issuance. See Id., p. 227.

72 §2 of Revenue Memorandum Circular No. (RMC) 74-99 dated October

15, 1999.

This circular is an example of an agency statement of general applicability that

takes the form of a revenue tax issuance “bearing on internal revenue tax rules

and regulations.” Commissioner of Internal Revenue v. Court of Appeals, 329 Phil.

987, 1009; 261 SCRA 236, August 29, 1996, per Vitug, J., citing RMC 10-86. See



§2(2), Chapter 1, Book VII of Executive Order No. (EO) 292, otherwise known as

the “Administrative Code of 1987” dated July 25, 1987.

73 §106(A)(2)(a) of the Tax Code.

74 See Deoferio, Jr. and Mamalateo, supra, p. 201.

148



(Philippines)

however, regarded in law as foreign soil.75

This legal fiction

is necessary to give meaningful effect to the policies of the

special law creating the zone.76

If respondent is located in

an export processing zone77

within that ecozone, sales to

the export processing zone, even without being actually

exported, shall in fact be viewed as constructively exported

under EO 226.78

Considered as export sales,79

such

purchase transactions by respondent would indeed be

subject to a zero rate.80

Tax Exemptions

Broad and Express

Applying the special laws we have earlier discussed,

respondent as an entity is exempt from internal revenue

laws and regulations.

This exemption covers both direct and indirect taxes,

stemming from the very nature of the VAT as a tax on

consumption, for which the direct liability is imposed on

one person but the indirect burden is passed on to another.

Respondent, as an exempt entity, can neither be directly

charged for the VAT on its sales nor indirectly made to

bear, as added cost to such sales, the equivalent VAT on its

purchases. Ubi lex non

_______________

75 This zone is akin to the former army bases or installations within the

Philippines. Saura Import and Export Co., Inc. v. Meer, 88 Phil. 199, 202,

February 26, 1951.


77 An “export processing zone” is a specialized industrial estate located

physically and/or administratively outside customs territory,

predominantly oriented to export production, and may be contained in an



ecozone. §4(a) and (d), Chapter I of RA 7916.

78 Article 23, Chapter I, Title I, Book I of EO 226. See §2.mm.2), Rule I,

Part I of the “Rules and Regulations to Implement Republic Act No. 7916,

otherwise known as ‘The Special Economic Zone Act of 1995.’ ”


80 §106(A)(2)(a)(5) of the Tax Code.

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(Philippines)

distinguit, nec nos distinguere debemus. Where the law

does not distinguish, we ought not to distinguish.

Moreover, the exemption is both express and pervasive

for the following reasons:First, RA 7916 states that “no taxes, local and national,

shall be imposed on business establishments operating

within the ecozone.”81

Since this law does not exclude the

VAT from the prohibition, it is deemed included. Exceptio

firmat regulam in casibus non exceptis. An exception

confirms the rule in cases not excepted; that is, a thing not

being excepted must be regarded as coming within the

purview of the general rule.

Moreover, even though the VAT is not imposed on the

entity but on the transaction, it may still be passed on and,

therefore, indirectly imposed on the same entity—a patent

circumvention of the law. That no VAT shall be imposed

directly upon business establishments operating within the

ecozone under RA 7916 also means that no VAT may be

passed on and imposed indirectly. Quando aliquid

prohibetur ex directo prohibetur et per obliquum. When

anything is prohibited directly, it is also prohibited

indirectly.

Second, when RA 8748 was enacted to amend RA 7916,the same prohibition applied, except for real property taxes

that presently are imposed on land owned by developers.82

This similar and repeated prohibition is an unambiguous

ratification of the law’s intent in not imposing local or

national taxes on business enterprises within the ecozone.

Third, foreign and domestic merchandise, raw

materials, equipment and the like “shall not be subject to x

x x internal revenue laws and regulations” under PD 6683

—

the original



_______________

81 §24, Chapter III of RA 7916.

82 §24, Chapter III of RA 7916, as amended by §4 of RA 8748 dated

June 1, 1999.

83 §17(1) of PD 66.

150



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charter of PEZA (then EPZA) that was later amended by

RA 7916.84

No provisions in the latter law modify such

exemption.

Although this exemption puts the government at an

initial disadvantage, the reduced tax collection ultimately

redounds to the benefit of the national economy by enticing

more business investments and creating more employment

opportunities.85

Fourth, even the rules implementing the PEZA law

clearly reiterate that merchandise—except those prohibited

by law—“shall not be subject to x x x internal revenue laws

and regulations x x x”86

if brought to the ecozone’s

restricted area87

for manufacturing by registered export

enterprises,

88

of which respondent is one. These rules alsoapply to all enterprises registered with the EPZA prior to

the effectivity of such rules.89

_______________

84 Estate of Salud Jimenez v. Philippine Export Processing Zone, 349

SCRA 240, 260-261, January 16, 2001. See 4th paragraph, §11, Chapter II

of RA 7916.

85 Commissioner of Customs v. Philippine Phosphate Fertilizer Corp.,

G.R. No. 144440, September 1, 2004, 437 SCRA 452, 457.

86 §1, Rule VIII, Part V and Rule XV of the “Rules and Regulations to

Implement Republic Act No. 7916, otherwise known as ‘The Special

Economic Zone Act of 1995.’ ”

87 A “restricted area” is a specific area within an ecozone that is

classified and/or fenced-in as an export processing zone. §2.h, Rule I, Part

I of the “Rules and Regulations to Implement Republic Act No. 7916,


88 A “registered export enterprise” is one that is registered with the



PEZA, and that engages in manufacturing activities within the purview of

the PEZA law for the exportation of its production. §2.i, Rule I, Part I of

the “Rules and Regulations to Implement Republic Act No. 7916,


89 §1, Rule XXV of the “Rules and Regulations to Implement Republic

Act No. 7916, otherwise known as ‘The Special Economic Zone Act of

1995.’ ” See §56, Chapter VI of RA 7916.

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(Philippines)

Fifth, export processing zone enterprises registered90

with

the Board of Investments (BOI) under EO 226 patently

enjoy exemption from national internal revenue taxes onimported capital equipment reasonably needed and

exclusively used for the manufacture of their products;91

on

required supplies and spare part for consigned equipment;92

and on foreign and domestic merchandise, raw materials,

equipment and the like—except those prohibited by law—

brought into the zone for manufacturing.93

In addition, they

are given credits for the value of the national internal

revenue taxes imposed on domestic capital equipment also

reasonably needed and exclusively used for the

manufacture of their products,94

as well as for the value of

such taxes imposed on domestic raw materials and supplies

that are used in the manufacture of their export products

and that form part thereof.95

Sixth, the exemption from local and national taxes

granted under RA 722796

are ipso facto accorded to

ecozones.97

In case of doubt, conflicts with respect to such

tax exemption privilege shall be resolved in favor of the

ecozone.98

And seventh, the tax credits under RA 7844—given forim-ported raw materials primarily used in the production

of

_______________

90 Article 11, Chapter I, Book I of EO 226.

91 Article 39(c), Title III, Book I of EO 226, expressly repealed by the

2nd paragraph of §20 of RA 7716. Consequently, enterprises registered

with the BOI after December 31, 1994 will no longer enjoy the incentives



provided under said article starting January 1, 1996.

92 Article 39(m), Title III, Book I of EO 226.


94 Article 39(d), Title III, Book I of EO 226, also expressly repealed by

the 2nd paragraph of §20 of RA 7716. Consequently, enterprises

registered with the BOI after December 31, 1994 will no longer enjoy the

incentives provided under said article starting January 1, 1996.

95

Article 39(k), Title III, Book I of EO 226.96 1st paragraph of §12(c) of RA 7227.


98 2nd paragraph of §12(c) of RA 7227.

152



(Philippines)

export goods,99

and for locally produced raw materials,

capital equipment and spare parts used by exporters of

non-traditional products100

—shall also be continuously

enjoyed by similar exporters within the ecozone.101

Indeed,

the latter exporters are likewise entitled to such tax

exemptions and credits.

Tax Refund as

Tax Exemption

To be sure, statutes that grant tax exemptions are

construed strictissimi juris102

against the taxpayer103

and

liberally in favor of the taxing authority.104

Tax refunds are in the nature of such exemptions.105

Accordingly, the claimants of those refunds bear the

burden of proving the factual basis of their claims;106

and of

showing, by words too plain to be mistaken, that the

legislature intended to exempt them.107

In the present case,

all the cited legal provisions are teeming with life with

respect to the grant of tax exemptions too vivid to pass

unnoticed. In addition, respondent easily meets the

challenge.

Respondent, which as an entity is exempt, is different

from its transactions which are not exempt. The end result,

how-

_______________



99 §16(c), Article III of RA 7844.

100 §16(e), Article III of RA 7844.

101 2nd paragraph of §23, Chapter III of RA 7916.

102 Commissioner of Internal Revenue v. General Foods (Phils.), Inc.,

401 SCRA 545, 550, April 24, 2003.

103 Commissioner of Internal Revenue v. Solidbank Corp., 416 SCRA

436, 461, November 25, 2003.

104

Agpalo, Statutory Construction (2nd ed., 1990), p. 217.105 BPI Leasing Corp. v. Court of Appeals, 416 SCRA 4, 14, November

18, 2003.

106 Paseo Realty & Development Corp. v. Court of Appeals, G.R. No.

119286, October 13, 2004, 440 SCRA 235.

107 Surigao Consolidated Mining Co., Inc. v. Collector of Internal

Revenue, 119 Phil. 33, 37; 9 SCRA 728, 732, December 26, 1963.

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(Philippines)

ever, is that it is not subject to the VAT. The non-taxability

of transactions that are otherwise taxable is merely a

necessary incident to the tax exemption conferred by law

upon it as an entity, not upon the transactions

themselves.108

Nonetheless, its exemption as an entity and

the non-exemption of its transactions lead to the same

result for the following considerations:

First, the contemporaneous construction of our tax laws

by BIR authorities who are called upon to execute or

administer such laws109

will have to be adopted. Their prior

tax issuances have held inconsistent positions brought

about by their probable failure to comprehend and fully

appreciate the nature of the VAT as a tax on consumption

and the application of the destination principle.110

Revenue

Memorandum Circular No. (RMC) 74-99, however, nowclearly and correctly provides that any VAT-registered

supplier’s sale of goods, property or services from the

customs territory to any registered enterprise operating in

the ecozone—regardless of the class or type of the latter’s

PEZA registration—is legally entitled to a zero rate.111

Second, the policies of the law should prevail. Ratio legis

est anima. The reason for the law is its very soul.

In PD 66, the urgent creation of the EPZA which

preceded the PEZA, as well as the establishment of export



processing zones, seeks “to encourage and promote foreign

commerce as a means of x x x strengthening our export

trade and foreign exchange position, of hastening

industrialization, of reducing domestic unemployment, and

of accelerating the development of the country.”112

_______________


109 Agpalo, supra, pp. 82-83.


111 §3(3) of Revenue Memorandum Circular No. (RMC) 74-99.

112 §§1 and 2 of PD 66.

154



(Philippines)

RA 7916, as amended by RA 8748, declared that by

creating the PEZA and integrating the special economic

zones, “the government shall actively encourage, promote,

induce and accelerate a sound and balanced industrial,

economic and social development of the country x x x

through the establishment, among others, of special

economic zones x x x that shall effectively attractlegitimate and productive foreign investments.”

113

Under EO 226, the “State shall encourage x x x foreign

investments in industry x x x which shall x x x meet the

tests of international competitiveness[,] accelerate

development of less developed regions of the country[,] and

result in increased volume and value of exports for the

economy.”114

Fiscal incentives that are cost-efficient and

simple to administer shall be devised and extended to

significant projects “to compensate for marketimperfections, to reward performance contributing to

economic development,”115

and “to stimulate the

establishment and assist initial operations of the

enterprise.”116

Wisely accorded to ecozones created under RA 7916117

was the government’s policy—spelled out earlier in RA

7227—of converting into alternative productive uses118

the

former military reservations and their extensions,119

as well

as of providing them incentives120

to enhance the benefits



that would be derived from them in promoting economic

and social development.122

_______________

113 2nd paragraph of §2, Chapter I of RA 7916.

114 Article 2.1, Chapter I of EO 226.




118 Tiu v. Court of Appeals, 361 Phil. 229, 242; 301 SCRA 278, 289,

January 20, 1999.

119 1st paragraph of §2, RA 7227.

120 §§12 and 15 of RA 7227.

121 John Hay Peoples Alternative Coalition v. Lim, 414 SCRA 356, 369,

October 24, 2003.

122 2nd paragraph of §2, RA 7227.

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(Philippines)

Finally, under RA 7844, the State declares the need “to

evolve export development into a national effort”123

in order

to win international markets. By providing many exportand tax incentives,

124

the State is able to drive home the

point that exporting is indeed “the key to national survival

and the means through which the economic goals of

increased employment and enhanced incomes can most

expeditiously be achieved.”125

The Tax Code itself seeks to “promote sustainable

economic growth x x x; x x x increase economic activity; and

x x x create a robust environment for business to enable

firms to compete better in the regional as well as the globalmarket.”

126

After all, international competitiveness requires

economic and tax incentives to lower the cost of goods

produced for export. State actions that affect global

competition need to be specific and selective in the pricing

of particular goods or services.127

All these statutory policies are congruent to the

constitutional mandates of providing incentives to needed

investments,128

as well as of promoting the preferential use

of domestic materials and locally produced goods and



adopting measures to help make these competitive. Tax

credits for domestic inputs strengthen backward linkages.

Rightly so, “the rule of law and the existence of credible

and efficient

_______________

123 1st paragraph of §2, Article I of RA 7844.

124 §§4(c) of Article I, 16, and 17 of RA 7844.

125 2nd paragraph of §2, Article I of RA 7844.

126 §2 of the Tax Code, as amended by RA 8761 effective January 1,

2000; and by RA 9010, the effectivity of which has been retroacted to

January 1, 2001.

127 American Society of International Law Proceedings, “Indigenous

People and the Global Trade Regime,” 96 Asilproc 279, 281, March 16,

2002.

128 §20 of Article II of the 1987 Constitution.

129 2nd paragraph of §1 and §12 of Article XII of the 1987 Constitution.

156



(Philippines)

public institutions are essential prerequisites for

sustainable economic development.”130

VAT Registration, Not Application

for Effective Zero Rating,

Indispensable to VAT Refund

Registration is an indispensable requirement under our

VAT law.131

Petitioner alleges that respondent did register

for VAT purposes with the appropriate Revenue District

Office. However, it is now too late in the day for petitioner

to challenge the VAT-registered status of respondent, given

the latter’s prior representation before the lower courts and

the mode of appeal taken by petitioner before this Court.

The PEZA law, which carried over the provisions of the

EPZA law, is clear in exempting from internal revenue

laws and regulations the equipment—including capital

goods—that registered enterprises will use, directly or

indirectly, in manufacturing.132

EO 226 even reiterates this

privilege among the incentives it gives to such



enterprises. Petitioner merely asserts that by virtue of

the PEZA registration alone of respondent, the latter is not

subject to the VAT. Consequently, the capital goods and

services respondent has purchased are not considered used

in the VAT business, and no VAT refund or credit is due.134

This is a non sequitur. By the VAT’s very nature as a tax

on consumption, the capital goods and services respondent

has purchased are subject to the VAT, although at zerorate. Registration does not determine taxabil-ity under the

VAT law.

_______________

130 Schwab, extract from the Preface of the Global Competitiveness

Report 2003-2004, www.weforum.org, last visited January 27, 2005,

9:05am PST.

131 §236 of the Tax Code.

132 §17(1) of PD 66 and §56, Chapter VI of RA 7916.133 Article 77(1), Book VI of EO 226.

134 Petitioner’s Memorandum, p. 9; Rollo, p. 103.

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(Philippines)

Moreover, the facts have already been determined by the

lower courts. Having failed to present evidence to support

its contentions against the income tax holiday privilege of

respondent,135

petitioner is deemed to have conceded. It is a

cardinal rule that “issues and arguments not adequately

and seriously brought below cannot be raised for the first

time on appeal.”136

This is a “matter of procedure”137

and a

“question of fairness.”138

Failure to assert “within a

reasonable time warrants a presumption that the partyentitled to assert it either has abandoned or declined to

assert it.”139

The BIR regulations additionally requiring an approved

prior application for effective zero rating140

cannot prevail

over the clear VAT nature of respondent’s transactions.

The scope of such regulations is not “within the statutory

authority x x x granted by the legislature.141

First, a mere administrative issuance, like a BIR

regulation, cannot amend the law; the former cannot



purport to do any more than interpret the latter. The

courts will not coun-

_______________

135 CA Decision, p. 7; Rollo, p. 27; and CTA Decision, p. 5, Rollo, p. 35.

136 Magnolia Dairy Products Corp. v. National Labor Relations

Commission, 322 Phil. 508, 517; 252 SCRA 483, 490, per Francisco, J.

137 Commissioner of Internal Revenue v. Procter & Gamble Philippine

Manufacturing Corp., 204 SCRA 377, 383, December 2, 1991, per

Feliciano, J.

138 Ibid. See Advertising Associates, Inc. v. Collector of Internal

Revenue, 97 Phil. 636, 641, September 30, 1955.

139 Atlas Consolidated Mining & Development Corp. v. Commissioner of

Internal Revenue, 102 SCRA 246, 259, January 27, 1981, per De Castro, J.

140 §4.107-1(d) of RR 7-95.

141 Commissioner of Internal Revenue v. Solidbank Corp., supra, p. 448,

per Panganiban, J.

142 Vitug and Acosta, supra, p. 56.

158



(Philippines)

tenance one that overrides the statute it seeks to apply andimplement.

143

Other than the general registration of a taxpayer the

VAT status of which is aptly determined, no provision

under our VAT law requires an additional application to be

made for such taxpayer’s transactions to be considered

effectively zero-rated. An effectively zero-rated transaction

does not and cannot become exempt simply because an

application therefor was not made or, if made, was denied.

To allow the additional requirement is to give unfettereddiscretion to those officials or agents who, without fluid

consideration, are bent on denying a valid application.

Moreover, the State can never be estopped by the

omissions, mistakes or errors of its officials or agents.144

Second, grantia argumenti that such an application is

required by law, there is still the presumption of regularity

in the performance of official duty.145

Respondent’s

registration carries with it the presumption that, in the

absence of contradictory evidence, an application for



effective zero rating was also filed and approval thereof

given. Besides, it is also presumed that the law has been

obeyed146

by both the administrative officials and the

applicant.

Third, even though such an application was not made,

all the special laws we have tackled exempt respondent not

only from internal revenue laws but also from the

regulations issued pursuant thereto. Leniency in theimplementation of the VAT in ecozones is an imperative,

precisely to spur economic growth in the country and attain

global competitiveness as envisioned in those laws.

_______________

143 Id., p. 57.

144 Spouses Morandarte v. Court of Appeals, G.R. No. 123586, August

12, 2004, 436 SCRA 213, 225.

145 §3(m) of Rule 131 of the Rules of Court.

z

146 §3(ff) of Rule 131 of the Rules of Court.

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(Philippines)

A VAT-registered status, as well as compliance with the

invoicing requirements,147

is sufficient for the effective zero

rating of the transactions of a taxpayer. The nature of its

business and transactions can easily be perused from, as

already clearly indicated in, its VAT registration papers

and photocopied documents attached thereto. Hence, its

transactions cannot be exempted by its mere failure to

apply for their effective zero rating. Otherwise, their VAT

exemption would be determined, not by their nature, but bythe taxpayer’s negligence—a result not at all contemplated.

Administrative convenience cannot thwart legislative

mandate.

Tax Refund or

Credit in Order

Having determined that respondent’s purchase

transactions are subject to a zero VAT rate, the tax refund



or credit is in order.

As correctly held by both the CA and the Tax Court,

respondent had chosen the fiscal incentives in EO 226 over

those in RA 7916 and PD 66. It opted for the income tax

holiday regime instead of the 5 percent preferential tax

regime.

The latter scheme is not a perfunctory aftermath of a

simple registration under the PEZA law,

148

for EO 226

149

also has provisions to contend with. These two regimes are

in fact incompatible and cannot be availed of

simultaneously by the same entity. While EO 226 merely

exempts it from income taxes, the PEZA law exempts it

from all taxes.

Therefore, respondent can be considered exempt, not

from the VAT, but only from the payment of income tax for

a certain number of years, depending on its registration as

a pioneer or a non-pioneer enterprise. Besides, the

remittance of the aforesaid 5 percent of gross incomeearned in lieu of local

_______________

147 §113(A) of the Tax Code.

148 §24, Chapter III of RA 7916, as amended by §4 of RA 8748.

149 1st paragraph, §23, Chapter III of RA 7916.

160



(Philippines)

and national taxes imposable upon business

establishments within the ecozone cannot outrightly

determine a VAT exemption. Being subject to VAT,

payments erroneously collected thereon may then berefunded or credited.

Even if it is argued that respondent is subject to the 5

percent preferential tax regime in RA 7916, Section 24

thereof does not preclude the VAT. One can, therefore,

counterargue that such provision merely exempts

respondent from taxes imposed on business. To repeat, the

VAT is a tax imposed on consumption, not on business.

Although respondent as an entity is exempt, the

transactions it enters into are not necessarily so. The VAT



payments made in excess of the zero rate that is imposable

may certainly be refunded or credited.

Compliance with All Requisites

for VAT Refund or Credit

As further enunciated by the Tax Court, respondent

complied with all the requisites for claiming a VAT refund

or credit.150

First, respondent is a VAT-registered entity. This fact

alone distinguishes the present case from Contex, in which

this Court held that the petitioner therein was registered

as a non-VAT taxpayer.151

Hence, for being merely VAT-

exempt, the petitioner in that case cannot claim any VAT

refund or credit.

Second, the input taxes paid on the capital goods of

respondent are duly supported by VAT invoices and have

not

_______________

150 As a matter of principle, it is inadvisable to set aside such a

conclusion, because by the very nature of its functions and sans abuse or

improvident exercise of its authority, the Tax Court is “dedicated

exclusively to the study and consideration of tax problems and has

necessarily developed an expertise on the subject x x x.” Paseo Realty &

Development Corp. v. Court of Appeals; supra, per Tinga, J., p. 8.

151 Contex Corp. v. Hon. Commissioner of Internal Revenue, G.R. No.

151135, July 2, 2004, 433 SCRA 376, 386.

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(Philippines)

been offset against any output taxes. Although enterprises

registered with the BOI after December 31, 1994 would no

longer enjoy the tax credit incentives on domestic capital

equipment—as provided for under Article 39(d), Title III,

Book I of EO 226152

—starting January 1, 1996, respondent

would still have the same benefit under a general and

express exemption contained in both Article 77(1), Book VI

of EO 226; and Section 12, paragraph 2 (c) of RA 7227,

extended to the ecozones by RA 7916.



There was a very clear intent on the part of our

legislators, not only to exempt investors in ecozones from

national and local taxes, but also to grant them tax credits.

This fact was revealed by the sponsorship speeches in

Congress during the second reading of House Bill No.

14295, which later became RA 7916, as shown below:

“MR. RECTO. x x x Some of the incentives that this bill provides

are exemption from national and local taxes; x x x tax credit for

locally-sourced inputs x x x.”

x x x x x x x x x

“MR. DEL MAR. x x x To advance its cause in encouraging

investments and creating an environment conducive for investors,

the bill offers incentives such as the exemption from local and

national taxes, x x x tax credits for locally sourced inputs x x x.”153

And third, no question as to either the filing of such claims

within the prescriptive period or the validity of the VATreturns has been raised. Even if such a question were

raised, the tax exemption under all the special laws cited

above is broad enough to cover even the enforcement of

internal revenue laws, including prescription.154

_______________

152 This provision has been expressly repealed by the 2nd paragraph of

§20 of RA 7716. See note 94.

153 Legislative Archives, Committee Report No. 01027, House of

Representatives, December 14, 1994, pp. 00132 & 00141.

154 Commissioner of Customs v. Philippine Phosphate Fertilizer Corp.;

supra, pp. 9-10.

162



(Philippines)

Summary

To summarize, special laws expressly grant preferential

tax treatment to business establishments registered and

operating within an ecozone, which by law is considered as

a separate customs territory. As such, respondent is exempt



from all internal revenue taxes, including the VAT, and

regulations pertaining thereto. It has opted for the income

tax holiday regime, instead of the 5 percent preferential tax

regime. As a matter of law and procedure, its registration

status entitling it to such tax holiday can no longer be

questioned. Its sales transactions intended for export may

not be exempt, but like its purchase transactions, they are

zero-rated. No prior application for the effective zero ratingof its transactions is necessary. Being VAT-registered and

having satisfactorily complied with all the requisites for

claiming a tax refund of or credit for the input VAT paid on

capital goods purchased, respondent is entitled to such

VAT refund or credit.

WHEREFORE, the Petition is DENIED and the

Decision AFFIRMED. No pronouncement as to costs.

SO ORDERED.

Sandoval-Gutierrez, Corona, Carpio-Morales andGarcia, JJ., concur.

Petition denied, judgment affirmed.

Note.—While tax avoidance schemes and arrangements

are not prohibited, tax laws cannot be circumvented in

order to evade the payment of just taxes. (Commissioner of

Internal Revenue vs. Lincoln Philippine Life Insurance

Company, Inc., 379 SCRA 423 [2002])

——o0o——

163

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